|
|
|
|
|
|
|
May 2010 |
|
From
the editors of CCH Federal Securities Law Reporter, CCH Blue Sky
Law Reporter and the
securities publications of Aspen Publishers, this
update describes important developments covered in these publications, as well
as timely topics of interest generally to federal and state securities
practitioners. Also included is a “Hot Topic of the Month,”
with research tips and references to CCH and
To view past issues
of the Securities Update, please visit http://business.cch.com/updates/securities.
If you have
questions or comments concerning the information provided below, please contact
me at rodney.tonkovic@wolterskluwer.com.
CCH Federal Securities Law Reporter
SEC Proposes Significant
Revisions to Asset-Backed Securities Offerings. The SEC approved the issuance of a
proposal that would significantly revise Regulation AB and other rules relating
to the offering process and disclosure and reporting practices for asset-backed
securities. The proposed rules would better inform investors about asset-backed
securities by requiring the disclosure of standardized information about the
loans in the pool with computer-readable data tags. The loan level information
would be provided when an asset is securitized, and additional information
would be provided on an ongoing basis. Issuers of asset-backed securities would
file a computer program that allows investors to analyze information about the
loans within the pool of assets on the SEC's Web site. The program would
provide information about how the loan payments are distributed to investors,
how losses or the lack of payment on the loans will be divided among investors
and when administrative fees are paid to service providers. Investors also
would be given more time to consider the information before making an
investment decision. The proposal would also require the sponsor to hold five
percent of each class of asset-backed securities and not to hedge those
holdings and would require additional information about originators and
sponsors. Release No. 33-9117 is reported at ¶88,891 (IntelliConnect)
(IRN)
(ip
access user).
New Large Trader
Reporting System Proposed.
The SEC approved a proposal that would establish a large trader reporting
system to allow the agency to identify and monitor the activities of
significant market participants. Large traders would be identified as those
whose transactions in exchange listed securities equal or exceed two million
shares or $20 million during any calendar day, or 20 million shares or $200
million during any calendar month. These traders would be assigned an
identification number to be used by their broker-dealers to maintain and report
trade data. The proposal calls for the filing of a new form under Exchange Act
Section 13(h) on which large traders would identify themselves based on the
transactions criteria. The unique identification numbers would enable the SEC
to reconstruct market activity, analyze trading data and investigate
potentially manipulative, abusive or other illegal trading activity. Release
No. 34-61908 is reported at ¶89,003 (IntelliConnect)
(IRN)
(ip
access user).
SEC Proposes
Amendments to Improve Access to Listed Options. The SEC approved the issuance of a
proposal to amend Regulation NMS Rule 610 to extend its scope and apply its
anti-discrimination requirement to the options markets. The rule would prohibit
an options exchange from unfairly impeding access to the quotation it displays
and would limit the fees an options exchange can charge investors and others
who wish to access a quote on the exchange. Release No. 34-61902 is
reported at ¶89,002 (IntelliConnect)
(IRN)
(ip
access user).
Unanimous Supreme Court Allows Vioxx Suit to Proceed. A unanimous Supreme Court held that the
limitations period for securities fraud cases begins to run on the earlier of
1) the date on which the plaintiff actually discovered the facts constituting
the violation or 2) the date on which a reasonably diligent plaintiff would
have made that discovery. In securities fraud cases, held the court, facts
showing scienter are among those that constitute the violation.
In this case, an investor class sued Merck & Co., alleging that the drug
maker knowingly misrepresented the risks associated with Vioxx, an arthritis
medication. A study showed adverse cardiovascular results for Vioxx when
compared to naproxen, another pain reliever. Merck suggested that this might be
due to the absence of a benefit conferred by naproxen rather than a harm caused
by Vioxx. The investors alleged that Merck committed fraud by promoting the
so-called "naproxen hypothesis" even though it knew the hypothesis
was false.
Writing for the court, Justice Breyer noted that securities fraud plaintiffs
must show that it is more likely than not that the defendant acted with the
relevant knowledge or intent to state a claim. In these cases, stated Justice
Breyer, it would "frustrate the very purpose of the discovery rule"
in the Sarbanes-Oxley Act limitations provision if the limitations period began
to run regardless of whether a plaintiff had discovered any facts suggesting
scienter. "So long as a defendant concealed for two years that he made a
misstatement with an intent to deceive," wrote
the court, "the limitations period would expire before the plaintiff had
actually "discover[ed]" the fraud." In applying this standard,
the court concluded that an FDA warning letter to Merck which stated that the
company had "minimized" a study's "potentially serious
cardiovascular findings," and the pleadings filed in products-liability
actions alleging that Merck had "omitted, suppressed, or concealed
material facts" concerning Vioxx, were insufficient to initiate the
limitations period. The FDA letter and the complaints did not contain any
specific information concerning the alleged deceptive promotion of the naproxen
hypothesis, concluded the court. Merck & Co., Inc. v. Reynolds (
3rd Circuit
Rejects Liability Theories in CFO's Criminal Trial. In ruling on a pre-trial interlocutory
appeal, a 3rd Circuit panel rejected the legal theories underlying several
criminal fraud charges against the former chief financial officer of
Bristol-Myers Squibb. The court also found that the trial judge properly
excluded testimony from a government expert witness. The case will, however, go
forward on charges based on other misstatements and omissions, conspiracy,
aiding and abetting and other counts. The charges arose from statements made by
Frederick Schiff, the former CFO, concerning Bristol-Myers' inventory backlog.
As alleged, Mr. Schiff and others offered incentives to their wholesalers to
carry larger than normal inventories to conceal the negative impact that the
backlog would have on future sales. The officers then allegedly made material
misstatements and omitted material facts concerning the inventory situation in
analyst calls.
With regard to the claimed omissions, the 3rd Circuit initially held that Mr.
Schiff had no fiduciary duty to rectify the allegedly material misstatements
made by another executive during the analyst calls. The panel referred to the
3rd Circuit's 2000 decision in Oran v. Stafford (2000-01 CCH Dec.
¶91,205), where the court determined that a duty to disclose existed when there
is 1) insider trading, 2) a statute requiring disclosure or 3) an inaccurate,
incomplete or misleading prior disclosure. The government argued that Mr.
Schiff's duty to disclose arose from a general fiduciary obligation owed by
"high corporate executives" to the company's shareholders. The court rejected
the government's argument that the
Finally, the court held that the trial judge properly excluded proffered expert
testimony from a government witness. The government sought to present an expert
to testify on materiality and the company's stock price drop following the
disclosures, but the appeals panel found that the expert's evidence was not
sufficiently tied to the facts of the case and would not aid the jury in
resolving factual disputes. The appellate court noted, however, that the trial
judge stated that if the government properly laid the foundation for the expert's
testimony at trial, then the prosecution could make a renewed application to
the court to present the stock price drop through the expert as evidence of
materiality.
Group
Pleading Doctrine Not Substantive Ground for Fraud Liability. In
an SEC enforcement action, a district court (SD NY) denied in part motions to
dismiss claims brought by the Commission against former officers and directors
of an Internet portal that targeted Spanish and Portuguese-speaking markets.
According to the complaint, the company improperly recognized revenue earned
through base book, incremental revenue, and contingent transactions by two of
its subsidiaries in order to meet its revenue projections and consequently made
misleading statements in SEC filings, as well as to external auditors and
potential investors. The SEC alleged that the executives aided and abetted the
company's violations of the antifraud and recordkeeping provisions of the
securities laws. The court had previously dismissed all of the SEC's claims
against two board members and some of the claims against two officers, but the
SEC was granted leave to replead and did so.
The court first found that the complaint alleged with sufficient particularity
that the directors made material misstatements. According to the court, the
complaint provided enough detail to give the directors fair notice of the
conduct with which they were charged. The complaint, however, was vague
regarding the role of a company officer and failed to plead with the required
particularity that the officer was liable for the misstatements. Next, the
court found that the Commission properly pleaded that the directors acted with
scienter but failed as to the officer. The Commission successfully alleged that
the directors knew or should have known that disclosures misstated the amount
of the company's barter revenue and thus misstated the percentage of revenue
attributable to barter transactions. The allegations regarding the officer,
however, were conclusory and accordingly dismissed.
The court then turned to the aiding and abetting claims and found that the
Commission alleged that the officer had aided and abetted the company's primary
violations because she had actively participated in contingent transactions and
knew that services that were given away were recorded as revenue. The complaint
then successfully alleged that the officers and directors aided and abetted the
company's violations of the recordkeeping provisions of the securities laws
because they were sufficient to show that the executives substantially assisted
the company in its improper recordkeeping and revenue reporting. Finally, the
complaint adequately alleged that the executives caused the company's books and
records to be falsified and that a director had made false statements to
auditors.
In a related action, a company officer's motion for summary judgment was
granted. The officer, according to the complaint, did not report an oral
contingency to the company's finance department, thus causing it to be
inaccurately recorded as revenue. The officer argued that the Commission
offered no facts to support its claims. The court agreed, stating that the SEC
seemed to believe that the group pleading doctrine freed it of the requirement
to link the officer to the making of a misstatement. In other words, the doctrine
is only a pleading device, not a substantive ground for fraud liability.
Moreover, the Commission actually conceded at oral argument that it could not
prove that the officer bore personal responsibility for the misstatements. SEC
v. Espuelas (SD NY) is reported at¶95,656 (IntelliConnect)
(IRN)
(ip
access user) and ¶95,657 (IntelliConnect)
(IRN)
(ip
access user).
CCH Blue Sky Law Reporter
Texas Adopts
Preliminary Evaluation of License Eligibility for Persons with Criminal
Backgrounds. Persons
applying for a broker-dealer, agent, investment adviser or investment adviser
representative license in Texas may request a criminal history evaluation
letter from the State Securities Board to preliminarily determine the persons'
eligibility to receive the license. Persons enrolled (or planning to enroll) in
an education program to prepare for an initial license or who plan to take an
examination for an initial license and believe they might be ineligible for a
license because of a conviction or deferred adjudication for a felony or
misdemeanor may request the criminal history evaluation letter. The request
must state the basis for the person's potential ineligibility, provide certain
specified information, and be accompanied by a $100 fee. ¶55,517F (IntelliConnect)
(IRN)
(ip
access user), ¶55,591E (IntelliConnect)
(IRN)
(ip
access user), ¶55,595E (IntelliConnect)
(IRN)
(ip
access user).
New York AG
States Claims Against Manager of Madoff Feeder Funds. The Supreme Court of New York (
Although the
defendants argued that any alleged misrepresentations were balanced by
cautionary language in the offering memoranda, which provided that investment
management duties could be delegated to independent money managers without
prior notice or investor consent, the court ruled that the "bespeaks
caution" doctrine does not apply to misrepresentations of present or
historical facts. Moreover, documentary evidence showing that some investors
were aware that monies were invested with Madoff did not bar the Attorney
General's claim because the complaint alleged that hundreds of investors were
not of this fact. Finally, the defendants' contention that the Attorney General
could not show loss causation was rejected because loss causation is not an
element of a Martin Act claim. People v. Merkin is reported at ¶74,821 (IntelliConnect)
(IRN)
(ip
access user).
Aspen Federal Securities Publications
Practicing Under
The
This month’s hot
topic is margin transactions. Margin transactions involve speculation in
securities with borrowed money. Section 7 of the Exchange Act imposes margin
controls designed to prevent excessive use of credit for the purchase or
carrying of securities. In enacting these controls, Congress intended to reduce
the aggregate amount of credit resources devoted to market speculation and to
achieve a more balanced use of such resources in commerce, industry, and
agriculture.
Under Section 7(a),
the Federal Reserve Board has authority to impose margin standards on certain
persons for securities other than exempted securities. The standards thus
prescribed by the Board apply to: broker-dealers and national securities
exchange members (Regulation T); banks and nonbank lenders (Regulation U); and
borrowers (Regulation X).
The Federal Reserve
Board's duties under the Exchange Act relate chiefly to the determination of
margin to be required on security loans, and the SEC has responsibility to
enforce the Board's determinations. There is no private cause of action under
Exchange Act Section 7 and the accompanying regulations. As the Second Circuit
reasoned in Bennett v. United States Trust Co. of New York (CA-2 1985),
there is no evidence that Congress intended to create such a private cause of
action. Moreover, Congress did not enact Section 7 for the special benefit of
investors. Although the protection of individuals was an incidental purpose,
the primary objective was to protect the overall economy from excessive
speculation. Finally, recognizing a private cause of action would undermine the
purposes behind Section 7.
We publish
information in a wide range of resources (e.g., Federal Securities Law
Reporter, SEC Today, Securities Regulation - Loss & Seligman, etc.), and
document types (cases, laws, regulations, newsletter articles, treatise
discussion). For example:
- Federal Securities Law Reporter
o
Exchange
Act Section 7(a) at ¶22,001 (IntelliConnect)
(IRN)
(ip
access user)
o
Regulation
T at ¶22,251, et seq. (IntelliConnect)
(IRN)
(ip
access user)
o
Regulation
U at ¶22,301, et seq. (IntelliConnect)
(IRN)
(ip
access user)
o
Regulation
X at ¶22,351, et seq. (IntelliConnect)
(IRN)
(ip
access user)
o
Bennett
v. United States Trust Co. of New York (CA-2 1985) at ¶92,250 (IntelliConnect)
(IRN)
(ip
access user)
o
CCH
Explanations (e.g., ¶22,011 (IntelliConnect)
(IRN)
(ip
access user))
·
SEC
Today
o
House
Passes Securities Act of 2008 Enhancing SEC Enforcement Powers (9-12-08) (IntelliConnect)
(IRN)
(ip
access user)
·
Securities
Regulation – Loss & Seligman (e.g., Chapter 8.B.4 (IntelliConnect)
(IRN)
(ip
access user))
·
SEC
Answer Book – Johnson & McLaughlin (e.g., § 3.08 (IntelliConnect)
(IRN)
(ip
access user))
·
Jim Hamilton’s World of Securities
Regulation
IPO Vital Signs
IPO
Vital Signs,
an advanced IPO research analysis tool, assists IPO professionals and pre-IPO
companies satisfy their most challenging research needs and answers hundreds of
mission critical questions for all the players in the IPO process. IPO
Vital Signs’ tabular data analyses
focus on issues surrounding client advisement, deal negotiation, and prospectus
disclosure.
IPO
Week in Review,
a weekly e-newsletter to keep professionals up to date with recent filing and
going public activity, is an important element of the IPO Vital Signs
system or is available by separate subscription. Coverage includes a monthly
feature article on recent trends in going public in the
To
see how an IPO Vital Sign works click on the Vital Sign title below:
|
|
|
|
|
|
|
Use IPO Vital Sign
#324 to… ·
Review
the number and percentage of companies going public in each SIC Code ·
Analyze trends
over time and drill down into the different SIC
Codes to see ·
IPO issuers’ company
names and business descriptions ·
Review “Prospectus
Summary” first paragraphs (Final Prospectus business descriptions) ·
Issuers’ headquarters
by country and state ·
Offer amounts ·
Offer dates |
Tip!
Click on blue numbers to drill down for more
information.
Select
a number of issuers’ final prospectus business descriptions by clicking in
boxes of those you wish to review in the third column (placing a check-mark in
each box), and clicking the [COMPARE] button at the top of the fourth column.